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December 7, 2015

CAISO Scores Notable Victory In Rare Antitrust Suit

In Order Nos. 888 and 2000, the Federal Energy Regulatory Commission (FERC) sought to foster competition in wholesale power markets by encouraging utilities to transfer control of their high voltage transmission assets to Independent System Operators (ISOs), entities created to administer wholesale power markets and grid access with a high degree of independence from all market participants. Utilities in many parts of the country acted on that encouragement, and ISO- administered markets now account for a large portion of domestic electricity trading.

As FERC-regulated entities, ISOs need FERC approval to implement and modify their tariffs. Given the complexity of power markets and the amounts at stake, legal challenges to ISO filings and actions taken under their tariffs are predictably commonplace. These challenges almost always take place at FERC, with judicial involvement limited to review of final FERC orders. Various legal doctrines, such as Primary Jurisdiction[1] and the Filed Rate Doctrine,[2] act as deterrents to lawsuits against ISOs by disaffected parties.

A lawsuit filed by the Imperial Irrigation District (IID) in the Southern District of California against the California Independent System Operator  (CAISO) in July of this year was thus a very unusual development.[3] Not surprisingly, CAISO moved to dismiss the suit on numerous grounds including that the suit is barred under the above-mentioned Primary Jurisdiction and Filed Rate Doctrines. On November 24, 2015, the district court granted in part and denied in part CAISO’s motion.[4] While some aspects of the ruling rest on dubious reasoning, on the whole the order represents a victory for CAISO. Because of CAISO’s similarity to other ISOs, the decision should reinforce the disincentive for lawsuits against ISOs generally.

CAISO is the principal grid operator in California, and IID is one of seven other entities that oversee lesser regions (known as balancing authority areas or BAAs) in the state. IID’s BAA lies in the southeast corner of the state, east of Los Angeles and San Diego and bordering on Mexico. Under its FERC-approved tariff, CAISO determines the maximum amount of power that can be safely and reliably imported (maximum import capability or MIC) from neighboring BAAs. For many years, CAISO set the MIC for imports from IID’s area at 462 MW.

In 2011, the CAISO Board approved a plan to support California’s renewable energy goals through upgrades to the grid. Among the listed upgrades was the re-conductoring of Path 42, a transmission line running from IID’s Coachella Valley substation to a substation of Southern California Edison Company, which is within the CAISO footprint.  This upgrade would have increased IID’s 2019 target MIC to 1400 MW. Relying on CAISO’s action, IID’s Board approved construction of the portion of the upgrade within IID’s system. Construction began in 2013 and was completed in 2015 at a cost of $35 million.

Meanwhile, in 2013, the owners of the 2200 MW San Onofre nuclear generating plant in Southern California decided to shut the plant down prematurely due to steam tube defects in newly installed steam generators.  This led CAISO to re-evaluate expected power flows in Southern California. In 2014, CAISO concluded that generating facilities connected directly to the CAISO grid would need all of the new transmission capacity made available by the new upgrades and therefore reduced IID’s 2019 expected MIC to zero. In response, IID filed its lawsuit against CAISO.

IID’s complaint alleged claims for monopolization and attempted monopolization of the market for transmission services and operation in Southern California, in violation of Section 2 of the Sherman Act. IID claimed that CAISO’s actions were motivated in part by an intent to eliminate IID as a competitor and force it to join CAISO. It also included state law claims for breach of implied contract, quantum meruit, restitution and conversion.[5]  As noted, CAISO has moved to dismiss, asserting that (1) the claims are barred by the Filed Rate Doctrine and federal preemption, both of which dictate that those kinds of claims belong exclusively before FERC; (2) FERC has Primary Jurisdiction over the claims; (3) under recent cases interpreting the scope of Section 2 of the Sherman Act, the antitrust claims fail to state a claim upon which relief can be granted; and (4) IID failed to substantiate its state law claims.

The court first took up a contention by IID that FERC lacks jurisdiction over antitrust claims under Otter Tail Power Co. v. United States, 410 U.S. 366 (1973), invalidating CAISO’s Filed Rate Doctrine and preemption arguments. In Otter Tail, a municipal community sued its host investor-owned utility (IOU) for monopolization when the utility attempted to prevent the community from forming a municipal utility by refusing to wheel third-party power to it. The utility argued that as an entity subject to regulation by the Federal Power Commission under the Federal Power Act (FPA), it was immune from antitrust liability. The Supreme Court rejected the utility’s argument, holding that “[a]ctivities which come under the jurisdiction of a regulatory agency may nonetheless be subject to scrutiny under the antitrust laws.” 410 U.S. at 372. As CAISO pointed out, however, it was not arguing that it was immune from antitrust liability, so Otter Tail was beside the point.  The fact that utilities are subject to the antitrust laws does not divest the FERC of its exclusive jurisdiction over filed rates. The IID court agreed with CAISO.

The court next took up three arguments by IID that the Filed Rate Doctrine did not apply to its complaint. IID contended, first, that its claims related not to “rates,” but rather to its entitlement to import capacity over CAISO’s system.  Again, the court sided with CAISO, noting that the Filed Rate Doctrine applies not only to rates, but allocations of power and transmission capacity that affect rates, under Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953 (1986), and Transmission Agency of Northern California v. Sierra Pac. Power Co., 295 F.3d 918 (9th Cir. 2002)(TANC).[6] The court also found that, to the extent IID’s state law claims were predicated on the existence of an implied contract, they were foreclosed by the holding in AT&T Corp. v. Central Office Tel., Inc., 524 U.S. 214 (1998), that a contract cannot override a regulated entity’s tariff. In other words, IID was foreclosed from arguing that CAISO had committed by contract to provide greater import capability than prescribed by application of its tariff. And, because IID’s state law claims for quantum meruit and restitution (but not for conversion) were derivative of the breach of implied contract claim, the court said that those claims must be dismissed as well.

IID’s second argument was that the holding in TANC that the Filed Rate Doctrine prohibits courts from “assuming hypothetical allocations of interstate transmission capacity” was irrelevant since IID’s complaint involved an actual, not hypothetical, allocation of additional import capability by CAISO.  The court rejected this argument too, finding that TANC foreclosed IID’s position whether its complaint involved a hypothetical or an actual allocation. The court noted that in TANC, the Ninth Circuit had recognized that FERC had functionally combined rate regulation with regulation of transmission capacity, by mandating open transmission access at non-discriminatory, publicly-disclosed rates. Accordingly, whether a plaintiff asks a court to enforce an alleged entitlement to transmission capacity or simply to assume it, FERC’s jurisdiction over the entitlement is exclusive under the Filed Rate Doctrine.

IID’s third argument was that CAISO was wrong in claiming that IID’s damages could only be calculated by assuming that the MIC allocation yielded a result other that the amount CAISO calculated pursuant to its FERC-approved tariff, which was forbidden by the Filed Rate Doctrine. According to IID, its damages claim had nothing to do with the tariff, but rather arose out of the fact that IID spent $35 million on upgrading Path 42 in reliance on CAISO’s approval of the upgrades. In addition, IID claimed that CAISO was wrong in relying on the tariff, since CAISO had misapplied it in reducing IID’s MIC.[7]

In response to these arguments, the court sided with IID, holding that “While the filed rate doctrine precludes court review of claims affecting rates that are charged or allocations of transmission capacity made pursuant to a FERC-approved tariff, that doctrine is not read so broadly as to preempt a court’s jurisdiction in any matter that may touch upon a federally-regulated entity’s tariff.[8] The court cited Brown v. MCI WorldCom Network Services, Inc., 277 F.3d 1166 (9th Cir. 2002)(Brown), which held that the Filed Rate Doctrine did not preclude a lawsuit against a regulated telephone service provider for charging rates in excess of its filed tariff. The court said that in accusing CAISO of misapplying its tariff-based planning procedures to eliminate the MIC, IID had sufficiently stated facts from which the court could conclude that IID’s claims fell outside the purview of the Filed Rate Doctrine.[9]

In a footnote, the court held that even though IID’s complaint rested on a claim of entitlement to a specific allocation of transmission capacity, that was not inconsistent with the Ninth Circuit’s ruling in TANC. It distinguished TANC on the basis that the plaintiff in that case based its claim on an entitlement which FERC had already rejected in an administrative proceeding, whereas IID was asserting that it was not receiving the allocation that FERC had approved  through its acceptance of the CAISO tariff.[10] Whether this is a compelling reason to distinguish TANC may be open to debate, especially since the court’s ultimate ruling on the merits of IID’s complaint would arguably raise the same kinds of concerns that led the Ninth Circuit to uphold the dismissal of the TANC complaint on Filed Rate Doctrine grounds.

More important, however, the IID court overlooked a distinction between the Federal Communications Act (FCA), which was at issue in Brown, and the FPA, which governs CAISO’s tariff. In allowing the complaint to proceed in Brown, the Ninth Circuit relied in part on the fact that the FCA included a provision for customers to bring civil suits for violations of tariffs in federal court. 277 F.3d at 1170, citing 47 U.S.C. §207.  In contrast, the FPA contains no such provision, and courts have held that no such right exists under the FPA.[11]

In any event, having found that the Filed Rate Doctrine did not bar suits to enforce tariff provisions, the court denied CAISO’s motion to dismiss the IID complaint “to the extent IID’s antitrust and conversion claims are predicated on CAISO’s alleged miscalculation of IID’s MIC under CAISO’s tariff.”[12] The significance of this denial is unclear, since, as discussed below, the court subsequently dismissed the antitrust claims on the basis that they failed to state plausible claims for relief, and dismissed the conversion claim on federal preemption grounds. It may be that the court was leaving the door open for IID to amend its complaint (since the court said that it was dismissing the IID’s claims without prejudice). Indeed, immediately after the decision was handed down, IID issued a press release suggesting that its Board was considering filing an amended complaint once it completed its legal review of the decision.[13]

The court next turned to CAISO’s argument that IID’s state law claims were barred under the doctrine of federal preemption. Having noted that it had already granted CAISO’s motion to dismiss IID’s other state law claims on the basis of the Filed Rate Doctrine, the court said it would only consider whether the conversion claim was preempted.[14] The court had no difficulty finding that that preemption did apply to that claim, in light of the holding in New England Power Co. v. New Hampshire, 455 U.S. 331, 340 (1982), that Congress, through the FPA, “delegated to [FERC] exclusive authority to regulate the transmission and sale at wholesale of electric energy in interstate commerce” (italics in original).

Turning to CAISO’s motion to dismiss on Primary Jurisdiction grounds, the court acknowledged that the Primary Jurisdiction doctrine allows courts to stay or dismiss a complaint pending resolution of an issue within the special competence of an administrative agency.[15] However, the court ruled that Primary Jurisdiction was inappropriate since, under Brown, that doctrine does not apply where resolution of plaintiff’s claim involves a “straightforward interpretation” of defendant’s filed tariff, and CAISO miscalculation of IID’s MIC, which was the basis of IID’s claims, could be resolved by a straightforward application of CAISO’s tariff.[16]

The latter conclusion is puzzling, to say the least. Setting MICs is by no means straightforward. It requires a 13-step process which takes into account configuration of the grid, historical contractual resource commitments, load-ratio shares of load serving entities, transmission contracts, and the way costs are contributed to the grid.[17] In concluding that it could resolve a dispute over the calculation of MIC without FERC assistance, it is unclear whether the court underestimated the complexity of the calculation or overestimated its own technical proficiency.  In either case, the decision to deny CAISO’s Primary Jurisdiction argument seems questionable.

In the remainder of its opinion, the court addressed CAISO’s arguments that IID’s complaint failed to state plausible claims for relief. As to IID’s antitrust claims, the court noted that they should be analyzed under doctrines of “refusal to deal” and “essential facilities.” Acknowledging the Supreme Court’s ruling in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004)(Trinko) that monopolists generally have no duty to aid competitors, the court looked to whether IID’s case fell within the exception to that rule for cases involving the unilateral termination by the monopolist of a voluntary and profitable course of dealing that suggests a willingness to forsake short-term profits to achieve an anticompetitive end.[18] The court found that IID did not come within this exception, both because CAISO was continuing (at least in the near term) to permit IID imports at the historical level of 462 MW; and because CAISO wasn’t forsaking any short term profits in limiting imports from IID, but rather was planning to use the transmission capacity for internal needs.[19]

The court also found that IID failed to state a cognizable claim under the essential facilities doctrine. As the court noted, under Trinko that doctrine does not apply “where a state or federal agency has effective power to compel sharing and to regulate its scope and terms.”[20] In this case, FERC has the power to “compel sharing” of CAISO’s import capability through regulatory oversight of CAISO’s implementation of the provisions in its tariff governing MIC calculation.[21]

A footnote to the discussion of the essential facilities doctrine concludes with a single sentence of dictum that seems to undermine the basis of those portions of the court’s decision that denied CAISO’s motion to dismiss.  In the footnote, the court responded to IID’s reliance on a 2004 Ninth Circuit decision recognizing the continuing validity of the essential facilities doctrine in the electricity context.[22] The court found that case inapposite on the basis that it required both monopoly  power and a refusal to wheel, whereas in IID’s case, CAISO was continuing to allow wheeling of imports from IID at the historical 462 MW level. In the concluding sentence to the footnote, the court stated, “To the extent [IID] is entitled to more capacity under CAISO’s tariff, IID should seek relief from FERC, a federal entity with the power to ‘compel sharing and to regulate its scope and terms.’ Trinko, 540 U.S. at 411.”[23]  As CAISO has no doubt noted, that single sentence captures the essence of CAISO’s Filed Rate Doctrine and Primary Jurisdiction arguments.

While the court granted in part and denied in part CAISO’s motion to dismiss, as noted the net effect of the ruling is that every aspect of the complaint is dismissed on at least one ground: the court denied the state law claims for breach of contract, quantum meruit, and restitution as preempted by the Filed Rate Doctrine; it denied the state law conversion claim under federal preemption; and it denied the antitrust claims for failure to state a claim on which relief can be granted. Because the dismissals are without prejudice, IID could conceivably amend its complaint and keep the litigation alive, but it is difficult to see how it could do so successfully.  Should the case end up in the Ninth Circuit, CAISO is likely to have the upper hand, as the decision is at its most vulnerable in the rulings favoring IID.

The decision is also good news for ISOs generally. ISOs exist to promote competition, and generally have no economic self-interest to advance. While the IID court may not have fully appreciated that fact, its agreement with CAISO that a reduction in calculated import capability is not actionable under the antitrust law as a refusal to deal or a violation of the essential facilities doctrine should give pause to market participants considering whether to pursue similar claims against other ISOs.

[1] The Primary Jurisdiction Doctrine allows courts to refer claims to administrative agencies such as FERC where desirable to promote uniformity and where there is a need for the specialized knowledge and expertise of the agency. See, e.g., United States v. Western Pacific R.R. Co., 352 U.S. 59 (1956); Distrigas of Massachusetts Corp. v. Boston Gas Co., 693 F.2d 1113 (1st Cir. 1982).

[2]  The Filed Rate Doctrine generally bars court litigation that involves challenges to administratively approved rates. See, e.g., Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571 (1981).

[3] Imperial Irrigation District v. California Independent Sys. Operator Corp. (IID), Case No. 15-CV-1576-AJB-RBB, Complaint filed July 16, 2015).

[4] IID, Order Granting in Part and Denying in Part Defendant’s Motion to Dismiss (Order).

[5] The breach of implied contract, quantum meruit and restitution all related to the same factual allegations as the antitrust claims, i.e., that CAISO injured IID by reducing its MIC. The conversion claim rested on an additional allegation that CAISO imported out-of-state power (in part to replace power lost by the shutdown of the San Onofre plant) over IID’s system without compensating IID. Complaint Pars. 168, 203-205.

[6] TANC was similar to IID’s situation in that it involved the construction of a transmission upgrade that was allegedly made less valuable by the defendant’s misconduct. The plaintiff  had agreed to jointly construct and operate the California Oregon Intertie with defendants, one of whom announced five years later than it intended to interconnect its facilities with another intertie. Because that subsequent interconnection would have reduced the capacity of the California Intertie, the plaintiff protested at FERC, and then filed a lawsuit in court when FERC rejected its protest. The Ninth Circuit upheld a lower court’s dismissal of the lawsuit under the Filed Rate Doctrine, holding that “[t]he impact of any award of damages to TANC for [defendant’s] alleged misrepresentation would be to undermine FERC’s ability to regulate rates” because it “would necessarily assume that, but for [defendant’s] alleged fraud, FERC would have made a specific allocation of electricity to TANC.” 295 F.3d at 933.

[7] IID, IID Opposition to Motion to Dismiss at 6.

[8] Order at 14.

[9] Order at 15.

[10] Order at 15 n. 8.

[11] See, e.g., Montana-Dakota Pub. Utils. Co. v. Northwestern Pub. Serv. Co., 341 U.S. 246,  251 (1957); Hendricks v. Dynegy Power Marketing Co., 160 F. Supp. 2d 1155, 1160 n. 4 (S. D. Ca. 2001); City of Gainesville v. Florida Power & Light Co., 488 F. Supp. 1258, 1275 (S. D. Fl. 1980).

[12] Order at 15.

[13] Http://

[14] Order at 16.

[15] Order at 18, citing Clark v. Time Warner Cable, 523 F.3d 1110 (9th Cir. 2008).

[16] Order at 18-19.

[17] FERC approved CAISO’s original proposal to establish the 13-step procedure, with modifications, in California Independent Sys. Operator, 119 FERC ¶ 61,164 (2007).

[18] Order at 20.

[19] Order at 20-21.

[20] Order at 22, quoting from Trinko, 540 U.S. at 411.

[21] Order at 23.

[22] Order at 23, citing Snake River Valley Elec. Ass’n v. PacifiCorp, 357 F.3d 1042 (9th Cir. 2004).

[23] Ibid.


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